Benefits of Setting up a Business Budget, Essay Example

When starting up a new venture or making changes to the existing operations, it is important that the leadership creates a budget for the project. There are two main budgeting methods used by entrepreneurs: Top-down and Bottom-up budgeting. These methods, their use, benefits, and risks will be analyzed below.

Bottom-up budgeting is generally used when determining the cost of individual unit-level projects. The costs of each business segment projects are added up, and therefore, they create the business level budget. This is a decentralized and participative budgeting method, promoting employee motivation and creates greater accuracy for larger organizations than top-down budgeting. However, thee disadvantages of Bottom-up budgeting include lack of context, expertise, and potential misrepresentation of the figures, due to the lack of insight into other related business units’ projects. This method also takes longer time to create on an individual level than Top-down budgeting and requires more negotiation.

Top-down budgeting, on the other hand, is suitable for communicating and reinforcing business goals, priorities, and creating projects that match the overall business objective. The allocation of the total amount is the top management’s job, and clear instructions are provided for business unit leaders to complete their sub-budgets. Top-down budgeting is more efficient than Bottom-up, while it provides the leadership a greater control over costs. However, as it is a centralized model, there is an increased need for collaboration between business unit management and top leadership. Executives would not have the necessary relevant knowledge related to the work, priorities, and processes of smaller business units.

As a conclusion, Top-down budgeting is more effective, however, without intensive collaboration between business unit management and executives, the allocation of funds can get out of control. Bottom-up budgeting is a more democratic solution, however, it takes more time to complete the process.